Fed's Dudley Hints at More Stimulus: Joblessness Too High

An influential Federal Reserve official on Thursday signaled some support for further asset purchases in the new year, arguing that recent improvement in U.S. jobs growth is still not enough to materially change the struggling labor market.

In a dovish speech only weeks before a key U.S. central bank policy meeting, New York Fed President William Dudley said any further purchases of Treasury securities in 2013 should hinge on the outlook for employment and inflation.

"While job growth has picked up some recently, its pace has been insufficient to materially change the labor market picture," Dudley, a permanent voting member of the Fed's monetary policy committee and a close ally of Chairman Ben Bernanke, said at a Pace University forum.

The Fed meets on Dec. 11-12 to determine whether to extend purchases of both Treasuries and mortgage-backed securities into the new year to try to lower longer-term rates and boost the U.S. economic recovery.

As it stands, the Fed is buying some $85 billion in longer-term bonds per month. Part of that is a program known as Operation Twist, in which the Fed buys $45 billion in longer-term Treasuries and sells the same amount of shorter-term ones.

While Twist expires at year end, most economists expect the Fed to simply ramp up its $40-billion quantitative easing program, dubbed QE3, to make up most if not all of the shortfall in outright purchases.

In September, when it launched QE3, the Fed said the bond-buying would continue until there is a substantial improvement in the labor market outlook.

"I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013," Dudley said.

'STAY THE COURSE'

The U.S. jobless rate has fallen from 8.3 percent in July, and from 8.9 percent a year ago. The country has had a good few months of job growth, and added a better-than-expected 171,000 new non-farm jobs last month.

Turning to inflation, Dudley said underlying inflation, compensation trends, and longer-term expectations for prices are "fully consistent" with the Fed's 2-percent inflation target.

"Let me reiterate that the Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course," Dudley said.

"When we achieve a stronger recovery in the context of price stability, I'll view it as consistent with our goals and not a reason to pull back on our policies prematurely."

The Fed has kept its key rate near zero since late 2008 to help battle the recession, and expects to keep it there for at least another two-and-a-half years. Answering questions from university students, Dudley said the Fed would "absolutely" remove that accommodation when "the time is right."

Illustrating the uncertainty facing both the economy and the Fed, Dudley pointed to the effects of superstorm Sandy, as well as the prospect of big tax rises and spending cuts set for the new year, known as the fiscal cliff.

The storm, which hit New Jersey, New York and other nearby states in late October, would likely shave 0.25 to 0.5 of a percentage point from fourth-quarter U.S. gross domestic product growth, Dudley estimated. The rebuilding will continue well into next year, "providing for somewhat stronger growth than otherwise would have been the case," he added.

Turning to the $600-billion fiscal cliff, Dudley warned that, if it is not addressed, the economic contraction is likely to be larger than normal because interest rates are so low.

An influential Federal Reserve official on Thursday signaled some support for further asset purchases in the new year, arguing that recent improvement in U.S. jobs growth is still not enough to materially change the struggling labor market.